Paul Kedrosky: Financials, Tempur-Pedic, and Wine

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September 12, 2008

Financials, Tempur-Pedic, and Wine

I have had to explain the following to myriad people in recent days, so I might as well put it here.

Q: If we can bail out Bear Stearns/Lehman/Fannie/Freddie/whatever, there is no way we can say no to bailing out GM, American Airlines, or even an Oracle, should the occasion arise. After all, these are all big and important companies.

A: True-ish. Granted, those are all big companies, and some of them are in as much trouble as the banks and brokers. Further, you are, in some abstract logical sense, correct in saying that once you start down the bailout slide you have no real bright line test to separate the saved and the damned. Bailout-seeking sorts can cheerfully make that argument outside financials -- and even inside financials it's worth pointing out that there is a high and growing risk we'll intervene (read:bailout) more of them than we should anyway.

But that still doesn't make non-financials such ready candidates for bailouts. I could go on and on about complex systems, tight coupling, leverage, and the like, but you need to think of it in terms of mattresses.

Most companies are like wine glasses and their markets like showroom-spaced Tempur-Pedic mattresses. You have seen the commercial: You can jump up and down like a mad thing (mostly), and the wine glass doesn't tip. Sure, cross-mattress carnage is doable, but you have to really work at it.

Financials aren't like that. If you jump up and down on the financials mattress, it's like pogo-ing on an "old, metal-spring mattress": the wine glass tips pretty much right away. And not only does it tip, the fluid jets straight across to the next mattress, where people were sleeping and generally minding their own business (think of it as the tech market, if you want), and it knocks them out of bed. The process continues, until the floor is covered in pissed-off people half-drowning in wine, which then seeps through to the ground floor and drowns the dog and ruins the central air conditioner.

Financials are like that.

Does it mean there is something wrong with the financial sector? Of course it does. Any semi-regulated sector that alternates so readily between torpor and terror -- and that can screw so many unrelated sectors while doing it -- needs to be re-engineered for the real world. But that's a subject for another day.